Italian 10 year bond below 5% Yield

One of the reasons cited for the stock rally today is that Italy’s 10 year bond yield dropped below 5%.

Italian 10 Year Yield

This is a level that was considered by many to be unsustainably high and has been at least part of the catalyst for the recent selloff in US equities.  While the spread vs. Bunds is certainly large for a Euro sovereign, the idea that >5% interest rates are unsustainable is a little scary when one thinks about the number in absolute terms.  5% is a pretty low rate in any other environment.  Consider the history of the US 10-year since the 1960s.  A vast majority of time has been spent above 5% interest rates.

It begs the question: given the large debts that global governments have accumulated just within the last 3 years in a low interest rate environment, what would happen in a rising rate environment?

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